Tuesday, May 1, 2012

Facebook: The $100 Billion Oxymoron (FB)

From William Bernstein's Efficient Frontier:*

I
generally don't comment on initial public offerings; there are some
neighborhoods in town I consider it wise to avoid, and when it comes to
investments, this is certainly one of them. The classic 1991 study on the
subject by Jay Ritter in Journal of
Finance, for example, showed that initial public offerings (IPOs)
produced a first-day pop of 16%, then underperformed the market by an
average of 28% over the next three years.

From the perspective of the first-day return, the average
IPO is "underpriced," designed as a bon-bon to preferred brokerage
customers. The "success" of the IPO is thus defined by the profit provided
to these initial purchasers, who are favored by the wirehouses in the same
way that casinos favor the highest rollers. That the issuing company and
the later purchasers do not come out so well doesn't seem to enter into
this rather perverse calculus of success.

But don't feel too sorry for issuing corporations, they
are past-masters at cranking out expensive shares when the markets are
frothy (not only as initial offerings, but also as seasoned ones) and
issuing debt when markets are cheap. In fact, if you've ever wondered just
who is taking the opposite side of the average mutual fund investor on the
wrong end of the dollar-weighted/time-weighted gap, the answer seems to be
corporate CFOs.

Several things struck me about the tsunami of media
attention over the "failed" Facebook IPO. The first was the discovery by
participants that instead of being able to quickly flip their purchase to
a second-day patsy, they were
the patsies (at least after one week).

But even more remarkable was the inappropriate application
of the term "investor" to Facebook's unhappy purchasers....MORE

I think it was Boston University's Zvi Bodie* who, shrugging off the
restraints of his MIT PhD, pointed out to the "expected return" crowd
that if it were true that the risk of negative returns decreases as the
time frame increases, the cost of long-term puts should decrease the
farther out you go.
Kind of an Emperor has no clothes thing to say.
I'm referring, of course to the equity index puts that Mr. Buffett sold....

...*William Bernstein (No slouch either, M.D. Neurologist, PhD. Chemistry,
dabbler in Modern Portfolio Theory, Bestselling Author, etc.) in one of
his Efficient Frontier pieces, "Zvi Bodie and the Keynes’ Paradox of Thrift" described the professor as "Academician, raconteur, and all-around good guy Zvi Bodie...".